GAO United States Government Accountability Office Report to Congressional Committees September 2004 MILITARY PERSONNEL DOD Needs More Data Before It Can Determine if Costly Changes to the Reserve Retirement System Are Warranted a GAO-04-1005
Accountability Integrity Reliability Highlights Highlights of GAO-04-1005, a report to congressional committees September 2004 MILITARY PERSONNEL DOD Needs More Data Before It Can Determine if Costly Changes to the Reserve Retirement System Are Warranted Why GAO Did This Study Since September 11, 2001, National Guard and Reserve personnel have served, and will continue to serve, a critical role in the Global War on Terrorism. As a consequence, Congress has focused attention on the fair treatment of reservists and directed GAO to review, among other things, the Department of Defense s (DOD) reserve retirement system. Currently, five legislative proposals exist that would lower the age when eligible reservists can receive their annuities. GAO assessed (1) DOD s reserve retirement system as compared to certain aspects of the active duty retirement system, (2) the extent to which DOD data suggest that changes to the reserve retirement system may be warranted, and (3) the potential costs and effects of the five legislative proposals. GAO recommends that DOD specify desired metrics for measuring the retention or attrition of senior officer and enlisted reservists most likely to be affected by changes to the reserve retirement system; determine if any gaps exist; identify changes, if any, to the current reserve retirement system that would address these gaps, to the extent that they exist; and evaluate any changes to the reserve retirement system in the context of the total force. In commenting on a draft of this report, DOD concurred with each of GAO s four recommendations. www.gao.gov/cgi-bin/getrpt?gao-04-1005. To view the full product, including the scope and methodology, click on the link above. For more information, contact Derek B. Stewart at (202) 512-5559 or stewartd@gao.gov. What GAO Found The active duty and reserve component retirement systems require 20 years of service for vesting, provide annuities that are based on 2.5 percent of basic pay for every creditable year served, and offer options to participate in the government s Thrift Savings Plan. Active duty members receive an immediate annuity upon retirement based on pay rates in effect on the date of retirement. Eligible reservists must wait until their 60th birthday to receive an annuity. The annuity of retired reservists who remain subject to recall is based on pay rates in effect when they reach their 60th birthday. Current data do not provide DOD with the information it needs to determine what changes, if any, to the reserve retirement system are needed. DOD has not established thresholds for attrition attributable to retirement and, without thresholds, it is not possible to assess the extent to which DOD is retaining the desired numbers of senior reservists or the extent to which retirement benefits influence decisions to leave or stay in the reserves. Nevertheless, GAO s analysis of DOD data for selected periods when reservists were deployed shows that the overall makeup of the reserve force by years of service, age, and pay grade has remained relatively even and that overall reserve retention rates, to date, have remained relatively stable. DOD has, however, identified certain high-demand occupational specialties, such as military police, where retention rates have decreased. While these cases do not necessarily suggest that uniform retirement reform is required, they do suggest that targeted corrective actions of some sort may be needed. The estimated cost of lowering the age of receipt, coupled with an associated increase in retiree health care costs, is significant and considering the fact that military basic pay will continue to grow and health care costs will continue to rise, the longer-term cost will be significant. Importantly, all reservists not just the minority of reservists who have deployed to recent operations would be covered under this change. In addition, reservists who are experiencing increased deployments may not be the beneficiaries of a reduction in the age of receipt, given that only one in four reservists currently stays in the reserves long enough to retire. Finally, DOD has not studied changes to the reserve retirement system in the context of the total force. Changes, if not evaluated from a total force perspective, could result in a significant increased cost with little or no benefit and may produce unintended consequences on DOD s active duty forces. Estimated 10-Year Increase in Appropriations of Five Legislative Proposals, Fiscal Years 2005-2014 (dollars in billions) Increased costs Immediate annuity Age 55 Age 53 on a sliding scale Age 55 on a sliding scale Age 55 with reduced annuity Retirement fund $20.45 $7.60 $2.88 $2.88 $3.59 Health care $14.24 $6.03 $2.49 $2.39 NA Total $34.69 $13.63 $5.37 $5.27 $3.59 Source: GAO analysis of DOD data. United States Government Accountability Office
Contents Letter 1 Results in Brief 3 Background 6 The Reserve Component Retirement System Mirrors the Active Duty Retirement System but Has Differences 12 The Extent to Which Changes Are Warranted to the Reserve Retirement System Is Unknown 17 Proposed Changes to Retirement System Are Costly and Need to Be Made in Context of the Total Force 25 Conclusions 31 Recommendations for Executive Action 32 Agency Comments 32 Appendix I Scope and Methodology 34 Appendix II Key Provisions of the Reserve Retirement Points System 38 Appendix III Reserve Workforce Profile Data 40 Appendix IV Attrition Rates for Reservists 47 Appendix V Comments from the Department of Defense 51 Appendix VI Related GAO Products 54 Tables Table 1: Availability of Retirement Provisions 12 Table 2: Estimated 10-Year Increase in Appropriations of Five Legislative Proposals between Fiscal Year 2005 and 2014 28 Page i
Figures Figure 1: Organizational Chart of the Ready Reserve 8 Figure 2: Percentage of Total Personnel, by Service, Serving on Active Duty or in One of the Reserve Components in Fiscal Year 2003 10 Figure 3: Total DOD Reserve Component Retention Rates, and Retention Rates for Officer and Enlisted Reservists, Fiscal Years 1991 through 2003 23 Figure 4: Reserve Enlisted Personnel Average Years of Service for Calendar Years 1991, 1997, and 2003 41 Figure 5: Reserve Enlisted Average Age for Calendar Years 1991, 1997, and 2003 42 Figure 6: Reserve Enlisted Personnel Average Pay Grade for Calendar Years 1991, 1997, and 2003 43 Figure 7: Reserve Officer Average Years of Service for Calendar Years 1991, 1997, and 2003 44 Figure 8: Reserve Officer Average Age for Calendar Years 1991, 1997, and 2003 45 Figure 9: Reserve Officer Average Pay Grade for Calendar Years 1991, 1997, and 2003 46 Figure 10: Reserve Attrition by Years of Service for Fiscal Year 1991 48 Figure 11: Reserve Attrition by Years of Service for Fiscal Year 1997 49 Figure 12: Reserve Attrition by Years of Service for Fiscal Year 2003 50 This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. Page ii
United States Government Accountability Office Washington, DC 20548 September 15, 2004 The Honorable John W. Warner Chairman The Honorable Carl Levin Ranking Minority Member Committee on Armed Services United States Senate The Honorable Duncan Hunter Chairman The Honorable Ike Skelton Ranking Minority Member Committee on Armed Services House of Representatives Over the past decade, the Department of Defense (DOD) has increasingly relied on members of the National Guard and Reserve to carry out its military operations domestically and abroad. At the end of fiscal year 2003, DOD had 1.2 million reservists. 1 Since September 11, 2001, DOD has called more than 335,000 reservists to active duty, and reservists will continue to serve a large critical role in the Global War on Terrorism. Congress has focused attention on the fair treatment of reserve component personnel as compared to their active duty counterparts. For example, in recent years Congress has improved health care benefits not only for reservists but for their families as well. 2 Currently, several legislative proposals are under consideration to change the reserve retirement benefit that would lower the age when eligible reservists can receive their annuities. 1 For the purpose of this report, the term reserve component, or reservists, refers to the collective forces of the Army Reserve, the Army National Guard, the Naval Reserve, the Air Force Reserve, the Air National Guard, and the Marine Corps Reserve. 2 See GAO, Military Personnel: Observations Related to Reserve Compensation, Selective Reenlistment Bonuses, and Mail Delivery to Deployed Troops, GAO-04-582T (Washington, D.C.: Mar. 24, 2004). Page 1
House Report 107-436 accompanying the Fiscal Year 2003 National Defense Authorization Act 3 directed us to review, among other things, DOD s reserve component retirement system. 4 We assessed (1) DOD s reserve retirement system as compared with certain aspects of the active duty retirement system, (2) the extent to which DOD data suggest that changes to the reserve retirement system may be warranted from a work force management perspective, and (3) the potential costs and effects of legislative proposals that address reserve retirement reform. A number of factors need to be considered when assessing the need for reserve retirement reform. Among them are the provisions of the active duty retirement system, the magnitude of any problems from a workforce management and retention perspective that changes to the reserve retirement system might potentially foster, other factors such as costs to fund the retirement system and the health care benefits afforded to retired reservists, 5 and the impact on the active duty forces. Any proposed changes that would permanently expand benefits should also be considered in the context of the serious fiscal challenges facing this country. The long-term fiscal pressure created by the known demographic trends and rising health care costs, combined with increased homeland security and defense commitments, and moreover, the gap between the estimated costs of DOD s transformation needs and likely budgetary resources, sharpen the need to carefully scrutinize the longer-term costs and implications before these changes are enacted into law. For fiscal year 2004, DOD estimates that it will need approximately $15.1 billion to fund its current reserve component retirement system. To conduct our review, we reviewed DOD reserve retirement policies and studies conducted by DOD and others that address reserve retirement 3 Public Law 107-314, Dec. 2, 2002. 4 This report is one of a series of GAO reports that address compensation and benefits for reserve personnel in response to this mandate. See GAO, Military Personnel: DOD Needs More Data to Address Financial and Health Care Issues Affecting Reservists, GAO-03-1004 (Washington, D.C.: Sept. 10, 2003); Military Personnel: DOD Needs to Assess Certain Factors in Determining Whether Hazardous Duty Pay Is Warranted for Duty in the Polar Regions, GAO-03-554 (Washington, D.C.: Apr. 29, 2003); and Military Personnel: Preliminary Observations Related to Income, Benefits, and Employer Support for Reservists During Mobilizations, GAO-03-549T (Washington, D.C.: Mar. 19, 2003). 5 Currently, retired reservists are eligible to participate in DOD s managed health care system when they reach age 60. Four legislative proposals would reduce the age of eligibility. Page 2
issues. We also collected and analyzed attrition data contained in DOD s Reserve Components Common Personnel Data System as well as attrition and cost data from the Office of the Assistant Secretary of Defense for Reserve Affairs and the Office of the DOD Actuary. We reviewed three points in time 1991, 1997, and 2003 because these three points represent key periods when reservists were called to active duty to support military operations. These included Operations Desert Shield/ Desert Storm, military operations in the Balkans and Southwest Asia, and current operations in Iraq and Afghanistan. In addition, we analyzed the results of recent DOD web-based career satisfaction surveys that were administered to reservists in each of the components. Based on our review of databases we used, we determined that the DOD-provided data were reliable for our purposes. Finally, we interviewed officials in the Office of the Assistant Secretary of Defense for Reserve Affairs, the Office of the DOD Actuary, the DOD Office of the Assistant Secretary for Health Affairs, and DOD s six reserve components the Army Reserve, the Army National Guard, the Naval Reserve, the Air Force Reserve, the Air National Guard, and the Marine Corps Reserve. We conducted our review from November 2003 through July 2004 in accordance with generally accepted government auditing standards. Further information on our scope and methodology appears in appendix I. Results in Brief The reserve component retirement system encompasses many of the aspects of the active duty retirement system, yet each system has certain unique provisions. For example, both systems require a minimum of 20 years of service for vesting and eligibility for retirement benefits, provide retirement annuities that are based on 2.5 percent of basic pay for every creditable year served, and offer opportunities to participate in the federal government s Thrift Savings Plan. The primary differences between the two systems are the age when active duty and reserve personnel receive their annuities and the effective pay rates that are used to calculate annuities. Eligible active duty military members receive an immediate annuity upon retirement that is based on pay rates in effect on the date of retirement. Eligible reservists must wait until age 60 to receive an annuity. The annuities of retired reservists who remain subject to recall are based on pay rates that are in effect when reservists reach their 60th birthday and, accordingly, their retirement is calculated at these higher pay rates. Current available data do not provide DOD with the information it needs to determine what changes, if any, to the reserve retirement system are warranted. While DOD has established enlisted personnel attrition ceilings as a performance metric for each of its six reserve components, it has not Page 3
established attrition ceilings for its reserve officers. In addition, it has not established thresholds for attrition attributable to retirement. For example, almost 18,000 reservists, representing 2.1 percent of DOD s selected reservists, retired from reserve duty in fiscal year 2003. Without thresholds or targets, however, it is not possible to assess the extent to which DOD is retaining the desired numbers of senior military members or to what extent retirement provisions influence decisions to leave or stay in the reserves. Furthermore, some retention rates may be artificially high because, at various times since September 11, 2001, DOD has implemented stop loss policies that have precluded servicemembers both active and reserve from separating from military service. Of all the services, the Army has made the greatest use of the stop loss policy. Nevertheless, our analysis of various DOD data for selected periods of time when reservists were called to active duty to support military operations reveals that the overall composition of the reserve force by years of service, age, and pay grade has remained relatively even and that DOD has not experienced significant declines in any of these variables. Similarly, departmentwide reserve retention rates for fiscal years 1991 through 2003 remained relatively stable, fluctuating between 76.5 and 82.9 percent, and the reserve components generally met their retention thresholds for enlisted personnel in recent years. In fiscal year 2003, for example, all components met their thresholds, with the exception of the Army National Guard and the Air National Guard who missed their thresholds by less than 1 percent. DOD has, however, identified certain high-demand occupational specialties where retention rates have decreased. While these cases do not necessarily suggest that uniform retirement reform is required, they do suggest that targeted corrective actions of some sort may be needed. For example, the retention rate for the military police within the Army Reserve dropped from approximately 67 percent in fiscal year 2000 to 49 percent in fiscal year 2003. Similarly, retention rates decreased for Army National Guard members in aviation dropping from 80 percent to approximately 30 percent in fiscal year 2002. Finally, recent responses by reservists to surveys administered DOD-wide reflect these retention statistics. Responses to questions about career intention indicated that most reservists intended to continue their service in the reserves. For example, in the most recent survey available September 2003 67.3 percent of the reservists who responded to the survey indicated that they would continue in the reserves and noted that reserve retirement was one reason for joining the reserves. However, only 52.6 percent of respondents in the Army National Guard and 53.5 percent of respondents in the Army Reserve, who were or had been called to active duty, indicated that they would stay in the Guard or Reserves. Page 4
The estimated cost of current legislative proposals to change the reserve component retirement system is significant and will have a number of associated effects. First, the estimated cost of lowering the age of receipt, from age 60 to as low as 53 with limitations or, in some cases, lower will be significant, given that all reservists who qualify for retirement and not just the minority of reservists who have deployed to recent contingency operations would be covered under this change. Based on DOD data, our cost estimates of current legislative proposals are substantial, projecting that the cost of reserve retirement will increase from about $3 billion to over $20 billion, depending on the proposal, over the next 10 years. The Congressional Budget Office had not estimated the cost of the retirement benefit for all five legislative proposals at the time of our review. When associated health care costs are factored in, the total projected cost increase ranges from over $3 billion to almost $35 billion. Considering the fact that military basic pay will continue to increase and health care costs will continue to rise, the longer-term cost will continue to be significant. Second, lowering the age of receipt will align the reserve retirement system more closely with the active duty retirement system, but this change may not affect reservists who are experiencing increased deployments and associated hardships. Many of these reservists are not likely to be the beneficiaries of a reduction in the age of receipt of annuity, given that only one in four reservists currently stays in the reserves long enough to become eligible for retirement. Third, retirement is only one human capital management tool available to DOD s workforce managers to compensate servicemembers for hardships experienced during their careers. For example, DOD has several special pays and allowances it can use to compensate deployed servicemembers, such as hazardous duty pay and family separation allowances. In addition, Congress has approved, but DOD has yet to implement, a special allowance for military personnel who experience frequent and/or long duration deployments. Fourth, DOD has recently identified a need to rebalance the reserve and active duty forces to reduce the stress on certain high-demand occupations. Better use of these human capital management tools can help DOD address the issues of equity and the increased use of reservists in military operations. Finally, DOD has not yet studied changes to the reserve retirement system in the context of the total force, even though these changes could have unintended consequences on DOD s active duty forces. For example, if the reserve retirement system were changed to offer an immediate annuity after 20 years of creditable service, some personnel who have made career decisions to remain in active duty until retirement might be inclined to leave active duty and apply to serve their remaining time in a reserve component. Page 5
This report contains recommendations that DOD (l) specify desired metrics for measuring the attrition rates of senior officer and enlisted reservists who are approaching retirement eligibility and, therefore, are most likely to be affected by changes to DOD s reserve retirement system; (2) determine if gaps exist between the desired and actual rates of attrition; (3) identify changes, if any, to the current reserve retirement system that would address these gaps, to the extent that they exist; and (4) evaluate any changes to the reserve retirement system in the context of the total force. In written comments on a draft of this report, DOD stated that it concurred with each of the four recommendations. Background DOD has relied on its reserve forces to varying degrees over time. Reserve personnel are eligible to receive compensation the same as that of active duty personnel when called to active duty. Dependence on Reserves in Military Operations Since the end of the Cold War, there has been a shift in the way DOD has used its reserve forces. Previously, reservists were viewed primarily as an expansion force that would supplement active forces during a major war. DOD has since moved occupational specialties that are key to conducting any military operation into the reserve forces and, therefore, increasingly relies on reservists not only to supplement but also to replace active forces in military operations worldwide. Accordingly, DOD has called more than 335,000 reservists to active duty since September 11, 2001. Today s increased reliance on the reserve components is a product of a number of factors: evolving total force policies, effects of force downsizing, increasing mission demands, and the Abrams Doctrine. In the aftermath of the Vietnam War, former Chief of Staff of the Army General Creighton Abrams asserted his belief that U.S. armed forces should not go to war again without the involvement of the National Guard and Reserve, given that decisions to employ reservists would reflect the national intent of the public. This philosophy became known as the Abrams Doctrine, and it has profoundly influenced DOD s national defense strategies and plans. In fact, and as pointed out in the Fiscal Year 2002 Annual Report of the Reserve Forces Policy Board, 6 DOD entered into the Global War on Terrorism dependent on the reserve components as the cumulative effect of 30 years of adherence to the Abrams Doctrine. In the Global War on Terrorism, the 6 Current and Future Challenges. Reserve Component Programs: The Annual Report of the Reserve Forces Policy Board, Office of the Secretary of Defense, April 2003. Page 6
reserve components are considered full partners, providing nearly one-half of the personnel who currently comprise the total force. The Reserve Forces Policy Board cautioned that if DOD retains this doctrine, reserve forces will be committed for the duration of military operations and used and stressed as never before, adding that appropriate adjustments will be necessary to spread the burden and provide for the long-term sustainability of the force. Composition of the Reserve Forces At the end of fiscal year 2003, DOD had approximately 1.2 million Guard and Reserve members in the Ready Reserve. Within the Ready Reserve, there are three subcategories, the Selected Reserve, the Individual Ready Reserve, 7 and the Inactive National Guard. 8 Figure 1 shows how the Ready Reserve is organized. 7 The Individual Ready Reserve is comprised principally of individuals who (1) have had training, (2) have served previously in an active component or the Selected Reserve, and (3) have some period of their military service obligation remaining. Members may voluntarily participate in training for retirement points and promotion with or without pay. Within the Individual Ready Reserve, there is a special category of members who have volunteered to be called to active duty under 10 U.S.C. 12304 when needed. 8 The Inactive National Guard consists of National Guard personnel in an inactive status in the Ready Reserve who are attached to a specific National Guard unit. To remain in the Inactive National Guard, members must muster once a year with their assigned unit, but they do not participate in training activities. Inactive National Guard members may not train for points or pay and are not eligible for promotion. Page 7
Figure 1: Organizational Chart of the Ready Reserve Ready Reserve Selected Reserve Individual Ready Reserve Inactive National Guard Selected Reserve units (includes military technicians) Individual Mobilization Augmentees Active Guard/Reserve Source: GAO presentation of DOD data. The Selected Reserve consists of reservists who serve in Selected Reserve units, as Individual Mobilization Augmentees, 9 as active Guard and Reserve members, 10 and as full-time support assets, such as military technicians. 11 DOD s selected reservists serve in one of six reserve components: the Army Reserve, the Army National Guard, the Naval Reserve, the Air Force Reserve, the Air National Guard, and the Marine Corps Reserve. The Army National Guard and the Air National Guard comprise what is known as the National Guard. As of fiscal year 2003, the Selected Reserve had a total number of 875,072 members. All selected reservists are subject to being 9 Individual Mobilization Augmentees are trained individuals assigned to an active component, Selective Service System, or Federal Emergency Management Agency organization s billet, which must be filled on or shortly after mobilization. Individual Mobilization Augmentees participate in training activities on a part-time basis with an active component unit in preparation for recall in a mobilization. The inactive duty training requirement for Individual Mobilization Augmentees is decided by DOD component policy and can vary from 0 to 48 drills a year. A minimum of 12 days of annual training is required of all Individual Mobilization Augmentees. 10 Active Guard and Reserve personnel are members of the Selected Reserve who are ordered to active duty or full-time National Guard duty for the purpose of organizing, administering, recruiting, instructing, or training the reserve component units. All Active Guard and Reserve members must be assigned against an authorized mobilization position in the unit they support. Units include the Navy Training and Administration of Reserve, and the Marine Corps Active Reserve programs. 11 Military technicians who provide full-time support to the reserve components concurrently serve as civilian employees and selected reservists and receive retirement annuities from both the federal civilian retirement system and the military reserve retirement system. Page 8
called to active duty before reservists in any of the other reserve categories. The President has the authority to order up to 200,000 selected reservists to active duty involuntarily for any operational mission for not more than 270 days without declaring a national emergency. Therefore, reservists must be prepared to report for active duty within 24 hours. The purpose of each selected reserve component is to provide trained units and qualified persons available for active duty in the armed forces in times of war or national emergency, and at such other times as the national security may require, to fill the needs of the armed forces whenever needed. 12 The National Guard is unique in that it has dual missions, both federal and state; when not in federal service, the Guard is available for use as provided by the constitution and laws of the state. The Guard is the only military force immediately available to a governor in times of emergency, including civil unrest and natural or manmade disasters. Under state law, the Guard provides protection of life and property and preserves peace, order, and public safety. Reliance on Guard and Reserve members varies from service to service. Figure 2 shows that, in fiscal year 2003, 53 percent of the Army s soldiers served in the Army National Guard or the Army Reserve and that 33 percent of Air Force military personnel served in the Air National Guard and the Air Force Reserve. Figure 2 also shows that the percentage of personnel serving in the Naval and Marine Corps Reserves was less than 20 percent for both components. 12 10 U.S.C. 10102. Page 9
Figure 2: Percentage of Total Personnel, by Service, Serving on Active Duty or in One of the Reserve Components in Fiscal Year 2003 Percentage of personnel serving in active duty, guard, or reserve status 100 90 19.9 13.4 18.8 18.7 80 70 60 50 40 30 20 10 33.1 47.0 19.4 67.2 81.2 81.3 0 Army Air Force Marine Corps Navy Army/Air Force/Marine Corps/Naval Reserve Army National Guard/Air National Guard Active duty personnel Source: GAO analysis of DOD data. Pay and Benefits In 1948, Congress passed the Army and Air Force Vitalization and Retirement Equalization Act which established the reserve retirement system because it believed that reservists did not receive sufficient salary as an incentive for a career and that, as reservists approached mid-career, they would leave reserve service unless an additional incentive were offered to them. Congress established a retirement annuity, receivable at age 60 upon completion of at least 20 years of service, to provide them with this additional incentive. The sole purpose of reserve retirement is to provide a monetary incentive for qualified reserve personnel to retain membership in the reserve components and continue their training. This incentive provides the reserves with a pool of skilled, trained, and readily available personnel to augment active duty forces in times of national emergency. The reserve retirement system has remained essentially unaltered since enactment in 1948. The Assistant Secretary of Defense for Reserve Affairs, under the Office of the Under Secretary of Defense for Personnel and Readiness, is responsible for DOD s reserve Page 10
retirement policy, and the reserve retirement system is funded through DOD s reserve military personnel appropriations. Reservists are currently entitled to a range of pay and benefits, depending on whether they are serving in part-time drilling or activated full-time duty status. When in normal part-time drilling status, reservists receive basic pay 13 on a prorated basis and are entitled to such benefits as unlimited access to commissaries, certain health care benefits, educational benefits, and life insurance. Reservists activated for contingency operations are eligible to receive the same compensation and benefits as active duty personnel. 14 While serving on active duty, reservists are entitled to basic pay and special pays and allowances at equivalent rates for active duty personnel and full health care benefits for themselves and their dependents. By law, 15 DOD is required to undertake a comprehensive review of military compensation every 4 years, and DOD compiles the findings and recommendations of these reviews into a report known as the Quadrennial Review of Military Compensation. In 1986, DOD was tasked by the President to perform an evaluation of the benefits and costs of reserve compensation. The resulting Sixth Quadrennial Review of Military Compensation was the first comprehensive review of reserve compensation that employed analytical models to assess the effects of the existing reserve compensation system and evaluate the costs and benefits of alternatives. The most recent quadrennial review assessed the effectiveness of current military compensation policies in recruiting and retaining a high-quality force. The Ninth Quadrennial Review of Military Compensation was conducted in 2002. 13 Basic military compensation consists of basic pay, basic allowance for housing, basic allowance for subsistence, and the federal tax advantage. The federal tax advantage is to account for the tax-free status of housing and subsistence allowances. It is the added amount of taxable income that servicemembers would have to receive in cash if housing and subsistence allowances were to become taxable in order for them to be as well off in after-tax income as they are under the existing system. Basic compensation does not include special and incentive pays and other allowances, such as deployment pays. 14 For a listing of benefits, see Military Personnel: Active Duty Benefits Reflect Changing Demographics, but Opportunities Exist to Improve, GAO-02-935 (Washington, D.C.: Sept. 18, 2002). 15 37 U.S.C. 1008(b). Page 11
The Reserve Component Retirement System Mirrors the Active Duty Retirement System but Has Differences Both active duty and reserve component retirement systems operate under the same military compensation principles. Differences exist between them because the reserve retirement system was not intended to be comparable to active duty retirement when it was created in 1948. Similarities between the systems include a minimum of 20 years of service for vesting and eligibility for retirement benefits, a calculation of retirement pay at 2.5 percent of basic pay for every creditable year served, and an opportunity to participate in the federal government s Thrift Savings Plan. The primary differences between the two systems are (1) the age when active duty and reserve personnel receive their annuities and (2) the effective pay rates that are used to calculate annuities. An eligible active duty military member receives an immediate annuity upon retirement that is based on pay rates in effect on the date of retirement. An eligible reservist must wait until age 60 the age at which federal civilian employees could retire in 1948 to receive an annuity. Retired reservists who remain subject to recall receive an annuity that is based on pay rates in effect when they reach age 60, and, accordingly, the retirement is calculated at these higher pay rates. Table 1 shows various retirement provisions that are available to active duty and reserve personnel. Table 1: Availability of Retirement Provisions Retirement provisions Annuity after 20 years of service Thrift Savings Plan Thrift Savings Plan matching funds Annuity based on 2.5 percent of creditable years of service Receipt of annuity upon retirement Receipt of annuity at age 60 Annuity based on effective basic pay rates at date of discharge Annuity based on higher effective basic pay rates at age 60 Active duty personnel X X X a X X X Reserve personnel X X X X X b X Source: GAO. a DOD has the authority to offer matching funds to active duty members serving in critical occupations but had not exercised this authority as of July 2004. See 37 U.S.C. 211(d). b An option exists for reservists to separate entirely from the reserves upon completing 20 years of qualifying service. Those reservists who select this option are no longer subject to being called to active duty. However, their retirement annuities, which they do not receive until age 60, are based on pay rates that were in effect at the date of separation from the service. Page 12
The Active Duty and Reserve Component Retirement Systems Were Not Intended to Be the Same The active duty and reserve component retirement systems contain many of the same aspects, but they were not intended to be the same. Similarities between the retirement systems are due to the fact that the underlying principles for both retirement systems are the same. The purpose of the military compensation system of which retirement is one part is to attract, retain, and motivate the number of quality personnel needed to maintain the desired level of national security. DOD has said that the military retirement systems both active duty and reserve should support and complement force management requirements (e.g., youth, vigor, and career development opportunities); be integrated into the military compensation system; and be structured to replace and maintain income for retirees. Both retirement systems have the shared purpose of maintaining a pool of skilled, trained, and readily available personnel subject to recall during time of war or national emergency. Differences between the retirement systems exist, however, because the reserve retirement system was originally intended to compensate civilian reserve retirees differently than active duty retirees. The active duty retirement system, which was created in the mid-1800s, was originally intended to provide for the separation of older officers with over 40 years of service to obtain a youthful and vigorous officer force, and improve promotion opportunities for younger officers. This active duty retirement system has been substantially modified over time. For example, the provision enabling active duty military personnel to retire after 20 years was first introduced in 1915. More than 30 years later, the 20-year provision was adopted for all active duty officers and enlisted personnel in all services. When the reserve component retirement system was created in 1948, Congress and the War and Navy Departments did not intend that it should be comparable to the active duty retirement system. In contrast, the purpose of the reserve retirement system was to improve retention, as opposed to encouraging attrition, by providing a financial incentive for qualified personnel to maintain their reserve affiliation and continue training in the reserves. Establishing age 60 the age at which federal civilian employees could retire in 1948 as the age at which reservists would be eligible to receive retirement annuities provided a mechanism to retain reservists for a longer period of time while compensating civilian reserve retirees differently than active duty retirees. 16 16 In 1967, Public Law 90-83, Sec. 1(75) created an entitlement for federal civilian employees to receive an annuity at age 55 with 30 years of service or at age 60 with 20 years of service. Page 13
The Active Duty and Reserve Component Retirement Systems Have Similar Features Both the active duty and the reserve component retirement systems require 20 years of service for vesting and benefit eligibility. The fact that neither the active duty nor the reserve component retirement system provides for reduced annuities if personnel serve less than 20 years provides a strong incentive for servicemembers to either leave the military after serving only a few years or stay in the military for 20 years or longer. For active duty members, each year of service counts as a qualifying year for retirement purposes. Reservists must earn a minimum of 50 points, each year, for the year to qualify for retirement purposes. Reservists typically train one weekend each month and earn 4 points for each weekend (two drills per day). In addition, they earn 1 point for each day of annual active duty training (typically 12 points for a 2-week period) and an additional 15 points annually for being a member of a reserve unit. Reservists earn an additional point for each day that they are called to serve on active duty. Between fiscal year 1992 and fiscal year 2001, reservists earned, on average, 64 retirement points per year. In fiscal year 2003, reservists earned, on average, 138 retirement points. The increase is likely due to the number of reservists who were called to active duty. Appendix II provides a more detailed discussion of the reserve retirement points system. Generally speaking, both retirement systems apply a rate of 2.5 percent to the number of creditable years served and then apply this rate to servicemembers basic pay to determine retirement annuities. 17 In the case of reserve personnel, the number of creditable years served is, essentially, a prorated number of calendar years of service. (Specifically, reserve years of creditable service are calculated by dividing a reservist s accumulated retirement points by 360 roughly, the number of days in a year.) Typically, current active duty servicemembers who retire after serving 20 years on active duty receive retirement annuities that are equivalent to 50 percent of average basic pay over their last 3 years of service. Current active duty servicemembers who retire after serving 30 years on active duty receive retirement annuities that are equivalent to 75 percent of their 17 For active duty servicemembers who entered the service prior to September 8, 1980, this rate is applied to a servicemember s final basic pay at the date of retirement. For most reservists who entered the service prior to September 8, 1980, this factor is applied to basic pay rates in effect on the retired reservist s 60th birthday. For active duty servicemembers who entered the service on or after September 8, 1980, this factor is applied to a servicemember s average basic pay during the last 36 months of service. For most reservists who entered the service on or after September 8, 1980, this factor is applied to the average annual basic pay rates in effect during the 3 years prior to the reservist s 60th birthday. Page 14
final basic pay. 18 In contrast, current reserve members who retire after serving all 20 years in the reserves, and who earn only the minimum 50 required points in each of those years, would receive annuities that will be equivalent to approximately 7 percent of basic pay. Most reservists, however, earn more than 50 points each year. Reservists can apply a maximum of 90 points each year toward their retirement calculation earned from their weekend drills and annual 2-week period of active duty training but can apply up to 365 points each year if they are called to active duty. Reservists who are called to active duty will earn more points, which will translate into a higher retirement annuity, if they serve their full 20 years. In addition, many reservists previously served some time on active duty before affiliating with one of the reserve components. Therefore, while their retirement annuities will be significantly less than the annuities of their active duty counterparts, the annuities of retired reservists who served on active duty at points during their careers will be greater than 7 percent of basic pay. Beginning in fiscal year 2001, both active duty and reserve personnel became eligible to participate in the federal government s Thrift Savings Plan on a voluntary basis. The Thrift Savings Plan is a tax-deferred savings and investment plan only available to currently employed federal government employees and provides active duty and reserve servicemembers the opportunity to contribute additional funds to their retirement. Service secretaries have the legislative authority, if they choose, to provide matching funds for active duty personnel in critical military occupational specialties, but not for reservists. Agency officials frequently cite monetary recruitment and retention incentives as effective for hard-to-fill positions. 19 To date, the service secretaries have not used this human capital flexibility for any active duty military personnel. 18 An active duty servicemember has the option of retiring under an alternative retirement system, known as REDUX, which reduces the percentage factor of 2.5 percent and, therefore, the amount of the annuity for each year that a servicemember retires with less than 30 years of service. However, this alternative retirement system also provides a servicemember with a $30,000 bonus at 15 years of service. The system, which was made voluntary in fiscal year 2000, was designed to encourage longer-term retention by providing an incentive for servicemembers who complete 20 years of service, and who are otherwise eligible, to remain on active duty beyond 20 years. 19 GAO, Human Capital: Effective Use of Flexibilities Can Assist Agencies in Managing Their Workforces, GAO-03-2 (Washington, D.C.: Dec. 6, 2002). Page 15
The Main Differences between the Two Systems Are the Age of Receipt of Annuity and the Effective Pay Rates Used to Calculate Annuities One significant difference between the active duty and reserve retirement systems is the age at which retirees receive their annuities. Active duty personnel immediately qualify for receipt of an annuity after 20 years of service, should they decide to retire, that compensates them for lost income potential. The Defense Science Board Task Force on Human Resources Strategy stated in a 2000 report that many, if not most, active duty retirees suffer a second-career earnings loss when transitioning to the civilian sector in their 40s or 50s and that immediate receipt of retirement pay reduces the financial penalty associated with the transition to a second career. As a result, the immediate annuity provides a strong incentive for active duty personnel to retire when eligible. Reservists similarly become eligible for retirement upon completing 20 years of service, but they are not eligible to receive an annuity until their 60th birthday the age at which federal civilian employees could retire when the reserve retirement system was enacted. The incentive for reservists to separate once retirement eligibility is achieved is not as strong, given that their retirement annuity is delayed until they reach age 60. A second significant difference between the two retirement systems is the basic pay rate that is used to calculate retirement annuities. Active duty retirement pay is based on basic pay rates that are in effect when active duty servicemembers retire. Reserve retirement pay is calculated differently, depending on retirement options that reservists select. Reservists who attain 20 years of qualifying service for retirement purposes and who elect to retire can, if otherwise eligible, (1) continue their affiliation in the reserves in a nondrilling status, (2) transfer to retired reserve status in which they retain their reserve affiliation but are not required to train, or (3) request a discharge. Reservists who continue their reserve affiliation in a nondrilling status do not drill or receive basic pay, but they can acquire additional retirement points. 20 In addition, they remain subject to being involuntarily called back to active duty. Reservists who transfer to retired reserve status do not earn basic pay or additional retirement points. They are, however, also subject to being involuntarily called back to active duty. Retirement pay for reservists who retain some form of affiliation with the reserves, and who are subject to involuntary recall to active duty until they reach age 60, is based on pay rates that are in effect on the reservists 60th birthday. Accordingly, this provision 20 For example, reservists who are in a nondrilling status can earn additional retirement points by successfully completing correspondence courses. Page 16
creates an incentive for reservists to retain their affiliation with the reserves until age 60 in order to benefit from the calculation of their annuity at the higher pay rate. Reservists who request a discharge from the reserves once they become retirement eligible are not subject to being called back to active duty. They also do not receive their annuities until their 60th birthday, but their retirement annuities are derived from basic pay rates in effect at the date of discharge. The Extent to Which Changes Are Warranted to the Reserve Retirement System Is Unknown Current available data do not provide DOD with the information it needs to determine what changes, if any, to the reserve retirement system are warranted. While DOD has established enlisted personnel attrition ceilings as a performance metric for each of its six reserve components, it has not established attrition ceilings for its reserve officers. In addition, it has not established thresholds or targets for attrition attributable to retirement. In fiscal year 2003, for example, 2.1 percent of DOD s selected reservists retired from reserve duty. Without thresholds or targets, it is not possible to assess the extent to which DOD is retaining the desired numbers of senior military members or the extent to which retirement provisions influence decisions to leave or stay in the reserves. Furthermore, some retention rates may be artificially high because, at various times since September 11, 2001, DOD has implemented stop loss policies that have precluded servicemembers both active and reserve from separating from military service. Of all the services, the Army has made the greatest use of this policy. Nevertheless, our analysis of various DOD data for selected periods of time when reservists were called to active duty to support military operations reveals that the overall composition of the reserve force by years of service, age, and pay grade has remained relatively even and that DOD has not experienced significant declines in any of these variables. Similarly, departmentwide reserve retention rates for fiscal years 1991 through 2003 remained relatively stable, fluctuating between 76.5 and 82.9 percent and the reserve components generally met their retention thresholds for enlisted personnel in recent years. In fiscal year 2003, for example, all components met their thresholds, with the exception of the Army National Guard and the Air National Guard who missed their thresholds by less than 1 percent. DOD has, however, identified certain high-demand occupational specialties where retention rates have decreased. While these cases do not necessarily suggest that uniform retirement reform is required, they do suggest that targeted corrective actions of some sort may be needed. For example, the retention rate for the military police within the Army Reserve dropped from approximately 67 percent in fiscal year 2000 to 49 percent in fiscal year 2003. Similarly, the retention rate decreased for Army National Guard Page 17